2017 Compensation Budgeting Outlook

Election years bring about a certain level of anxiety and unpredictability in terms of the results’ impact on the U.S. economy and compensation budget planning. So as we collectively begin the annual ritual of compensation budgeting, let’s start with a quick analysis of the projected economic climate for 2017.

The U.S. Economic Outlook for 2017
In a recent report, the Congressional Budget Office (www.cbo.gov) stated the following:

“Under the assumption that current laws governing federal taxes and spending will generally remain in place, the agency projects that real GDP will grow by 2.7 percent in 2017, as measured by the change from the fourth quarter of the previous year. According to CBO’s projections, the unemployment rate will fall to 5.0 percent in the fourth quarter of 2017. As slack in the labor market diminishes and firms must increasingly compete for a shrinking pool of unemployed or underemployed workers, growth in hourly compensation is expected to pick up.”

Of note is the CBO’s differing projection on the unemployment rate vis-à-vis figures from the US Department of Labor (DOL). As of August 4, 2016, the DOL reports the current US unemployment rate is 4.9%. The difference in statistics between the CBO and DOL stems from their calculation methodologies. The CBO figure is based overall economic trends and climate, while the DOL’s figure is based on the percent of individuals still looking for a job. As such, CBO is considered more conservative and realistic.

The key point here is that if unemployment continues to drop, the labor pool will shrink. This shrinkage will place additional pressure on organizations to compete for talent. This assessment will be especially true in recruiting and retaining “mission critical” positons. Thus, compensation budgeting will become more decentralized, making compensation budgets more difficult to predict in the future.

A U.S. and Canada Perceptive
The Economic Research Institute (www.erieri.com) has published “Planning Global Compensation Budgets for 2017.” From ERI:

“Salary increases are projected to remain stable at 3.0% in the United States and Canada from 2016 to 2017. Minimal change is also expected in unemployment over the same time period with Canada increasing slightly from 7.3% to 7.4%, and the United States decreasing from 4.9% to 4.8%.”

U.S. 2017 Compensation Budgeting – A 30,000 Foot Review

In recent months Astron Solutions consultants reviewed annual compensation budget planning survey results from a number of associations and consulting firms. The following is a brief summary from two of the premier organizations in this area: WorldatWork (www.worldatwork.org) and The Conference Board (www.conference-board.org).

WorldatWork: Total U.S. Salary Budget Increases by Employee Category



Source: WorldatWork 2016-2017 Salary Budget Survey

The Conference Board:
The Conference Board is projecting that median U.S. salary increase budgets for 2017 will be 3 percent. This is the same as the median increase The Conference Board has reported for the previous six years. The Conference Board expects this 3 percent salary increase to hold steady across all employment categories (nonexempt hourly, nonexempt salaried, exempt, and executive), again equal to actual 2016 increases.

Unknown # 1 – Impact of Recent Minimum Wage Changes

The push for the $15.00 national minimum wage is starting to appear in various states across the country. This contiunues to be a highly debated issue with a dramatic impact on compensation budgeting. However, this push often is not reflected in general compensation budgeting surveys. Increases in the minimum wage have a domino effect in setting formal pay ranges and often create compression in employee pay rates. The compression, in turn, requires additional compensation adjustments to effectively address. Here are a few perspectives to consider on this hot compensation topic. Please keep in mind that while our review of the matter takes a national perspective, be sure to check your state and local Departments of Labor for the latest minimum wage requirements in those jurisdictions.

1. Impact on Nonprofit Organizations
According to the Non Profit Times (www.nonprofittimes.com), "some 92 percent of non-profit leaders claim that their organizations’ financial sustainability would be in jeopardy due to minimum wage increases. In a recent survey, 30 percent responded that employee benefits would be reduced due to minimum wage increases. According to New York Council of Nonprofits CEO Doug Sauer, “you can raise the wage, but if government doesn’t want to pay it and donors say ‘we want more bang for the buck,’ it’s not a stable workforce. We’re squeezed.” A bump in government contracts would not finance a minimum wage increase for many agencies. Fundraising for increased operating costs such as employee wages is not a realistic target."

 2. Impact on the Economy
In a recent survey conducted by the Employment Policies Institute (www.epionline.org), "166 economists provided feedback on the economic impact of minimum wage increases. Nearly three-quarters of these US-based economists oppose a federal minimum wage of $15.00 per hour. 

The majority of surveyed economists believe a $15.00 per hour minimum wage will have negative effects on youth employment levels (83%), adult employment levels (52%), and the number of jobs available (76%). 

When economists were asked what effect a $15.00 per hour minimum wage will have on the skill level of entry-level positions, 8 out of 10 economists (80%) believe employers will hire entry-level positions with greater skills. 

A majority of surveyed economists (71%) believe that the Earned Income Tax Credit (EITC) is a very efficient way to address the income needs of poor families. Only five percent believe a $15.00 per hour minimum wage would be very efficient in addressing this need."

Unknown # 2 – Impact of FLSA Minimum Salary Threshold Changes for Exempt Status

Sibson Consulting (www.sibson.com) has identified two areas of concern with the recently approved changes in FLSA exemption salary levels.

1. Financial. These changes will impact a variety of areas, including the following:

• Salary increases for affected exempt employees to meet or exceed the proposed salary level  Overtime payments to newly classified non-exempt employees 
• Hiring of additional staff due to financial and resource constraints 
• Costs associated with layoffs for certain employees 
• Benefit costs given reclassification of employee jobs 
• Salary adjustments to ensure internal equity and prevent wage compression

2. Employee Relations. The following considerations can result in decreased employee morale and increased employee turnover, leading to negative bottom line organizational impacts. 

• Perceived loss of prestige and credibility following a change from exempt to non-exempt status
• Changes in job: diminished job autonomy with loss of independent discretion and decision making, less flexibility in work hours, and decreased opportunity for career development or advancement
• Change in level and type of benefits (e.g., vacation, tuition reimbursement)
•  Reduction in merit-based compensation to offset FLSA adjustments

Final Thoughts
So where do we go from here? In general, compensation budgeting continues to remain flat, averaging 3% again for 2017. Aggressive minimum wage and FLSA salary requirement changes will have a “hidden” impact on compensation budgeting. These hidden impacts will create potential artificial salary adjustments and employee compression correction scenarios not accounted for in the standard compensation budgeting process. As such, proactive and progressive employers will continue to move to a decentralized compensation planning process. A decentralized compensation planning process means that “mission critical” positions will have higher compensation budgeting percentages than non-mission critical positons, sometimes as much as two times the typical projected compensation budget levels.

The Fissured Workplace and Employee Misclassification

In recent times, companies such as Uber and Handy have been faced with lawsuits challenging whether the individuals working for them should truly be considered “contractors.” Are their “staff” in reality employees being denied rights reserved to those in the proper classification? In this issue of Astronology® we explore the fissured workplace and the accompanying issue of employee misclassification. How large of an issue is misclassifying employees? Is this part of larger concerns related to the fissured workplace?

What is the Fissured Workplace?
David Weil, an administrator for the United States Department of Labor’s Wage and Hour Division, popularized the term “fissured workplace” to describe the surge in employers’ use of contracted laborers. In 2014 Weil highlighted on the US Department of Labor’s blog what results from workplace fissuring: “The blurred lines from the fissured workplace make achieving compliance with the wage and hour laws we enforce a difficult task. Intense competition between business models like subcontracting, temporary agencies, labor brokers, franchising, licensing, and third-party management leads to low pay, and noncompliance pulls down standards for all – making it difficult for responsible employers to survive in low margin, fiercely competitive conditions. The costs in this race to be the lowest bidder are borne by workers deprived of their wages and their rights.” There’s a danger involved in a fissuring workplace: the danger of misclassification.

The Growth of Contracted Workers
But how many people actually are working in an independent contractor arrangement? To get a better understanding, economists Larry Katz and Alan Krueger replicated the 2005 Contingent Worker Survey in 2015. The results of the survey provide an estimate of how much labor is being contracted out by employers in the United States. The 2015 survey noted a jump from 10% in 2005 to 16% of workers in 2015 in “alternative arrangements,” working while not directly being an employee of an organization. Why the increase in outsourcing and contracting? In a Wall Street Journal online article, Anna Louie Sussman and Josh Zumbrun point to fissuring.

The Consequences of Misclassifying Workers in a Fissured Workplace
The Wage and Hour Division (WHD) website explains that although the department supports the proper use of independent contractors, there is a difference between legitimate independent contractors and misclassified employees. By classifying a worker as an independent contractor, an employer avoids expenses such as overtime pay, unemployment compensation tax, workers’ compensation insurance, and employee benefits such as sick pay & vacation. Such attempts to cut costs results in losses for everyone, however. Not only are employees cheated, but heavy fines from organizations found guilty of misclassification can add up to 41.5% of the contractor’s pay. Also of note is that these penalties can go as far back as three years. As a result, the WHD has worked with the IRS and many states to combat worker misclassifications. With 32 states cooperating in 2015, the WHD investigations resulted in more than $74 million in back wages for more than 102,000 workers in a variety of industries, including janitorial and hospitality.

“In general, independent contractors should comprise a small minority of most employers’ workforces,” states Jennifer Loftus, National Director for Astron Solutions. “Activities that are non-strategic in nature, and not the primary focus on the organization, are best candidates for outsourcing. When independent contractors or contract labor begin to comprise a noticeable and / or large portion of the workforce, the organization leaves the door open to lawsuits and investigations. When in doubt about workers’ proper classifications, check with outside legal counsel or other outside advisors. Proactive protection to the organization is advisable over negative consequences down the road.” Do you think fissuring workplaces will be curtailed as more misclassified employee cases come to light? Tell us your thoughts! We enjoy hearing from our Astronology® readers!

Overtime Out of Control? Effective Cost Management Strategies

Following the release of the May 18, 2016 final rule regarding adjustments to the overtime threshold for the Fair Labor Standards Act (FLSA), organizations are working to make changes to meet the new requirements. The ruling adjusts the minimum salary needed to qualify for exemptions to $913 a week, or $47,476 a year. This will affect an estimated 4.2 million American workers.

This means organizations will have to be vigilant in keeping accurate records of hours worked among all non-exempt employees, and of course be judicious with their overtime budgets. Overtime can carry an organization through treacherous times, or speed its descent into the red. The difference is a matter of strategy.

PLANNING YOUR APPROACH
While overtime is often used in the heat of a difficult moment, it also can be successfully incorporated into an organization’s business plan. If your organization frequently relies on employees clocking extra hours, consider an overtime audit.

Analyze how overtime is currently used, both economically and culturally. How many hours of overtime are used per month? Which employees take advantage of it, and how effectively? Has it become an expected part of their income?

Determine key periods when the use of overtime is necessary and plan accordingly. By formally strategizing, you’ll take the surprise and much of the stress out of the process.

SETTING LIMITS
When overtime is offered, a few employees often voluntarily shoulder the entire burden. Consider setting individual limits to prevent resultant health and / or motivational problems among overworked employees.

Another strategy for handling the restriction of overtime hours is a rotation system. In one such system, employees sign up for overtime on a list. After an employee works a certain number of extra hours, his or her name is scratched off, and the next employee on the list will be eligible for overtime. This allows for a pool of potential overtime workers for any shift, and prevents any one employee from shouldering too much of the burden.

Alternatively, you may wish to offer overtime only to key employees or groups of employees who can handle the extra hours without a significant dip in productivity.

Staff redeployment often can be used in place of, or alongside, overtime. Increased cross training will facilitate redeployment, allowing employees to wear several hats during a given period. If your employees are sufficiently cross-trained, you can plan for the absences that result from overwork.

If overtime is used frequently at your organization, find out how your employees think it could be better handled. A custom survey may let you know how the majority feels, and can include open-ended questions that may garner innovative strategies tailor-made to your organization’s culture.

HOW TO KNOW WHEN YOU SHOULD HIRE
As you would determine overtime caps for individuals, you also can set systemic limits to ensure that your organization won’t be overtaxed by overtime.

Consider the reasons you’re using overtime. If the burden is unlikely to abate in the near future, you may be pouring money into extra hours that would better be spent in training or hiring.

Some employers insist that turnover costs are higher than overtime costs when benefits, vacation, payroll, and training are taken into account. If this is a concern, consider calculating the average turnover cost at your organization using one of the numerous free turnover cost calculators available online (search on Google for “turnover cost” for a plethora of tools). You may find that overtime is more costly than hiring. If the cost is the same—i.e., if a new employee’s total compensation plus turnover cost is the same 150% of total wages you’d spend on overtime—remember to factor in the hidden costs that come from overextending employees. In such cases you’d be wise to hire instead of allowing too much overtime.

THE DANGERS OF OVERTIME
Overtime can be a response to absenteeism. However, exhausted employees on the clock are more prone to absence-inducing conditions. In other words, unscheduled overtime often creates absenteeism.

Overtime hazards include the following:

• Stress 
• Lower levels of performance 
• Fatigue-related errors 
• Workplace injuries 
• Sickness 
• Depression 
• Work / life imbalance
• Burnout

As with any change in workplace practices, make sure that any alteration in overtime strategy is accompanied by the appropriate communication, or you may face a backlash in morale. In cases where overtime is offered only to specific employees, the reasons given should be especially clear to avoid feelings of unfairness among co-workers.

These flexible options are suitable only in a non-union work environment, as union contracts govern overtime rules. By employing principled negotiation and integrative bargaining techniques during contract talks, however, unionized employers also may be able to effectively control overtime costs.